NEW YORK, Nov. 10 (Xinhua) -- The skyrocketing fiscal deficit needs urgent control but historical high unemployment and uncertainty of the economic recovery will make this task more difficult for the U.S. government, a senior analyst on U.S. economy told Xinhua in a recent interview.

Steven Hess, vice president and chief analyst of U.S. sovereign rating of leading rating agency Moody's Investors Service, said if the government can not reduce the deficit, which rolled to the highest level since World War Two during the last fiscal year, to a much lower level over the next few years, then the government's financial position will become much more difficult.

U.S. deficit has hit headlines again recently. Chinese Premier Wen Jiabao on Sunday called on the United States to keep its deficit in control, which can not only stabilize the U.S. dollar exchange rate but also bolster the world's economic stability and recovery. On Tuesday, Robert Hormats, the undersecretary for economic, energy and agricultural affairs of the U.S. State Department, said his government will narrow the fiscal deficit as a share of gross domestic product (GDP) once the economic recovery is solid.

3A Rating

More than two weeks ago, Hess warned that the United States may loose its 3A rating, the highest in Moody's scale, if it can't lower its deficit to a sustainable level in the next three to four years.

The U.S. government posted a record deficit of 1.417 trillion U.S. dollars in the year ended September 30, accounting for 10 percent of its GDP. Stimulus package to combat the severe recession and a series of bailout rescues to banks and automakers have put heavy burden on government spending.

Obama administration has predicted that deficits would top 1 trillion dollars through fiscal year of 2011.

The sovereign rating, mainly the probability of default on government bonds, of United States has been 3A since 1917. It will not change in the next 18 months as Hess has given a "stable" outlook of U.S. rating. But if for some reason the deficits are larger and the debt rises more rapidly than the government projected, then Moody's would have to reconsider what to do about the rating, Hess said.

"The ability of the government to pay (its bond on time) is based primarily on its budget and its ability to generate revenues, that in turn is dependent on economic conditions," Hess said. Usually when economy slows, tax revenues may fall because corporate profits and individual incomes are down, as in last fiscal year U.S. tax revenue fell by more than 16 percent.

"We are going to wait and see in the next budget, which will come out in February, what measures are proposed by the U.S. administration to reduce the budget deficit," Hess said. The current projections for the budget deficit for the next ten years show it falling down to somewhere between three and four percent of GDP and remaining at that level after another two or three years. But Hess said that level is still relatively high, and debt will continue to rise as percent of GDP, and as percent of government revenues, over that 10-year period.

Exit Schedule

When Hormats spoke to university students in Beijing on Tuesday, he said it is important the United States doesn't withdraw its stimulus too early.

Data shows that much of the 3.5 percent growth in third-quarter GDP was driven by government spending. Car sale and housing sale retreated once the effect of government programs like cash-for-clunkers or tax rebate faded.

Hess agreed that it is not "advisable" for the government to raise taxes or to cut expenditures during a recession, and a large deficit helps the economy for a period.

While many are concerned about fourth quarter's economic growth with less stimulus helping effect, Hess said he thinks the recovery going forward will remain positive. "We are not thinking that there is going to be a double dip or a W shape recession," he said.

But he pointed out that consumption growth will not be as rapid for the next a couple of years as it was prior to the recession, because households are fairly highly indebted, and their assets have lost value during the financial crisis.

"Therefore, we will not see a rapid bounce back. Our expectation is that real GDP will grow somewhere in the neighborhood of 2 percent in 2010," Hess said.

He said he expected the Federal Reserve to start raising interest rates sometime in second half of 2010, "if they do it at all." Fed will continue to reduce some of the monetary stimulus, which it already begun, and wait on the interest rates front until they are sure that the recovery is self-sustaining, Hess said.

China's Concern

As the largest foreign holder, China has been expressing concerns on its assets in U.S. government bonds. Hess agreed that one thing China would really like to see is much lower U.S. deficit level.

"Historically, ratings have been correlated with interest rates that are paid on government bonds," Hess said. "The interest rates paid on lower rated bonds are higher than the interest rates paid on higher rated bonds."

So, hypothetically, in case United States loses 3A rating, the treasury price falls and interest rate goes up, the bond will worth less in terms of book value to whoever holds it.

Despite issues like this as well as trade disputes and Renminbi exchange rate, both United States and China have "fundamental interest" in cooperation, Hess said. Having been rating Hong Kong and Macao for more than a decade and having visited Chinese mainland dozens of times, Hess is very familiar with the greater China economy.

Hess said he imagined President Obama will try to find "areas of common ground" for both countries when he visits China later this month.

Both countries are moving in the right direction in tackling the global imbalances, which is "a positive move," Hess said.